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Does a Strengthening Economy Need Interest Rate Cuts?

CAMS Weekly View from the Corner - Week ending 1/26/24

January 29, 2024

This past week we had an assortment of economic data releases with the most anticipated being Gross Domestic Product (GDP) and a Fed’s favored price inflation measure the Personal Consumption Expenditures Chain Price Index (PCE Index.)


Overall the price inflation measure continued to reflect a down trending growth rate.  Specifically, the PCE Less Food & Energy (considered a “core” price inflation measure and is often referenced by Chairman Powell) came in at a growth rate of 2.9% year-over-year. 


This remains uncomfortably north of the Fed’s 2% price inflation target and yet showed some continued gradual improvement.  All told, prices continue to elevate higher albeit at a bit slower growth rate than the previous month’s release.


4th quarter GDP measuring economic activity came in at a 3.3% annualized growth rate far exceeding growth expectations of 2%.


When we look at how this 4th quarter GDP growth compared to a year ago we see it grew 3.1% year-over-year. 


Staying with this year-over-year growth view, here is what GDP growth rates have looked like beginning with the 4th quarter of 2022:  .7%/1.7%/2.4%/2.9%/3.1%.  Note the consistent uptrend in the previous 5 quarters. 


To place this 5 quarter year-over-year growth rate storyline into some experiential context; here in the 21st century we have seen growth typically come in around the 2.5% level. 


To be clear we have toggled just north of and south of this 2.5% level as the previous couple of decades have unfolded.  There are times where this typical experience has been thwarted via recessions and catapulted higher coming out of recession, in particular post-Covid with the massive free money distribution, but all told the 2.5% general area has been the norm.


With the above data points freshly updated late last week we continue to ask the same tired question:  Why do we need interest rate cuts?


Again, note the 5 quarter economic growth trend above as a focal point


Via this GDP trend it offers the economy has first and foremost remained well above recession territory and secondly on a year-over-year growth basis has consistently posted higher levels of expansion over the previous 5 quarters.  Why are interest rate cuts so necessary in order to fix this economic backdrop?


On the price inflation front the Core PCE price index (again one of the Fed’s favored measures) remains quite north of their 2% target.  Importantly, as we have shared consistently over recent months as well as recent years, there are numerous price inflation measures most of which are well north of the Fed’s 2% target.


Historically, the point of the Fed cutting interest rates was to spur economic activity.  Why do we need to inject cheaper Fed dollars into the economic system when the system is performing right along the path of recent historical norms? 


Where in the economic growth backdrop and price inflation realities suggest that we need imminent interest rate support to prevent an imminent recession and/or a deflationary collapse?  If you are a consistent reader you may be noting our same tone and the same questions we have been asking aloud for X time now.  We do so because the data continues to beg the questions.


Fiscal Policy is Already Massively Expansionary


The historical approach to a challenged economic system is to cut interest rates and print money (Fed’s monetary policy) coupled with Fiscal policy approaches from the Administration/Congress of deficit spending – thinking debt spending – as in spending more than government revenues.


Specific to deficit spending the view is for the government to fill the void for the private sector in spurring economic activity when the private sector is struggling to keep economic growth going.  This view is meant to serve as a temporary stopgap approach in aiding the economic system.  The operative word here is “temporary” but this approach has become permanent. 


This is also known as living well beyond our means via government fiscal policy and boy are we ever living well beyond our means.


The government deficit spending is so outrageous do we really need to add on expansionary monetary policy (cutting interest rates/print money) to spur on economic activity that clearly is not recessing. 


If we do experience both policy approaches turning full-on simultaneously while also simultaneously having a growing economy and a price inflation backdrop that has yet to return to good behavior as an overall price inflation storyline (not just a few selected measures) it will be quite interesting to see what the downstream impact will look like.      


This is a storyline that has great potential to be fraught with sticky price inflation issues.


This would boil down to what would be a full guns blazing approach with government policies to aid a deflationary/recessing economic backdrop that in reality is growing and inflating.  That’s a head shaker to say the least. 


To give some context of the fiscal policy stimulus via debt spending we turn to the Treasury and offer line excerpts for selected periods directly from the Treasury.







Speaking to the 4th quarter GDP results we see via the above Treasury debt record that $560 billion (rounded) of new debt was added to the nation’s debt level.  This is an enormous amount of “spending beyond our means” in a short 90 day quarter that acted as support/stimulus to the economic backdrop and hence GDP growth. 


Continuing, do you remember back in the early summer (2023) when there was a “showdown” among D.C. political leadership on the debt ceiling issue at that time?  On June 1st an agreement was reached to suspend, not set a new limit but merely suspend the debt ceiling limit until 2025.  To get perspective this was just under 8 months ago.







Since early summer we see via the Treasury debt record that $2.6 trillion of new debt was added to the nation’s debt level.  Again, in less than 8 months time.


With these kinds of fiscal numbers (is it “stimulus” any longer or rather just standard operating procedure by D.C. officials?) we should not be surprised by positive growth in economic activity. 


This certainly is not a prescription for long-term vibrancy but this is where we are currently and what has been unfolding recently as well as here in the 21st century.  As we have offered many times in recent years – the 21st century is a story of debt and money printing with absurdly low interest rates overlaid.


Adding monetary stimulus (yet again) to the above mix leans right into lunacy and ultimately begs for downstream issues (yet again) as a result of a double-barreled policy approach when neither the economic system nor the price inflation storyline calls for such. 


As it stands interest rate traders are lowering odds of an interest rate cut in March but they remain confident of a cut by May with follow-on cuts expected. 


If data continues to point to the above type of growth the Fed may not deliver the expected cuts.  We will continue to share along the path – it surely should prove to be an interesting path in coming months.

I wish you well…

Ken Reinhart

Director, Market Research & Portfolio Analysis


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